Consumers may suffer with bankruptcy law changes

By KARSTEN STRAUSS Register Citizen Staff The passage of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act has changed the face of bankruptcy law in a way that some say does not benefit the average citizen. Connecticut-based bankruptcy attorney Peter Lawrence said the 500 plus page piece of legislation makes it harder for most filers. "In my view, as bankruptcy lawyer who's practiced for a long time, I think the whole thing was hugely negative for the average consumer debtor," Lawrence said. "I can honestly say that I witnessed very little abuse in the process in the cases that I filed over the last 10 years." "The most fundamental change that affects consumer debtors are the substantial revisions to section 707 of the bankruptcy code," Lawrence said. "Under the old law it was a relatively rare event for the United States Trustees office to move to dismiss a debtor's case for what was then called substantial abuse... The new law takes section 707 and basically turns it on its head." Called "means testing," if a debtor files for Chapter 7 bankruptcy and has a household income exceeding the median income of the debtor's state of residence, and it is decided based on that income that the debtor can pay $100 a month or $6,000 over a five year period, that debtor must forgo Chapter 7 and go on to Chapter 13. Chapter 7 is known as a liquidation bankruptcy in which the debtor seeks a full discharge of debts with no repayment. Another Connecticut-based bankruptcy attorney with 18 years experience, Gregory Jones, agrees that the Consumer Protection Act has made it more difficult for the average debtor. In his estimation, about 99 percent of the clients he has dealt with have filed for Chapter 7 after having paid off much of their debts but, with lingering costs from high credit card interest rates, are left with nowhere else to turn. "The credit card companies simply don't make as much money on those people as they could have," Jones said. Another of the Act's stipulations mandates credit counseling for those filing for bankruptcy. "If you've ever sat with a client and helped them navigate the screens and go through the online credit counseling, it's really not a device that's going to provide anybody with truly useful training or information," Lawrence said. "It adds typically $100 to the cost of a person filing bankruptcy because they have to do two sessions and each one typically costs around $50." Most debtors that Lawrence has dealt with genuinely require assistance in getting out of debts caused by job loss, illness, overwhelming medical bills, divorces, as well as excessive credit card debts, he said. "That debt, in my experience, was not incurred with the intent not to repay it," Lawrence said. Debtors have traditionally had access to an "automatic stay" that protects them from debt collection and lawsuits. Some of these "stays" have been eliminated under the new legislation. Those who have filed within about two years of filing another declaration of bankruptcy will not enjoy the benefits of "stay" protection unless a court can be convinced they should, Lawrence said. Both Lawrence and Jones say that the prime force behind the 2005 Act active and persistent lobbying by credit card companies for years prior to its signing by President George W. Bush on April 17, 2005. "All those big banks put pressure, and they had for years and this was a long time coming," Jones said. "It almost passed the year that 9/11 happened - 2001 - but the congress got sidetracked, the president got sidetracked with other things so it was put off until 2005 and it was finally passed. "That's in large part because I think the Republican congress was in the majority and because president Bush was there and he signed it and rubber-stamped it all," Jones said. "So big business basically took over." That debtors are required to show more financial proof of their situation is not a problem for Jones. His problem lies with the new income guidelines - means testing - on Chapter 7 filings, which he feels are unfair and don't take into account the personal circumstances of debtors, he said. Both attorneys said they would like bankruptcy law to go back to the way it was before the Act went into effect in October of 2005. "If the intent was to prevent a great deal of bankruptcy fraud, I don't think that intent is being fulfilled," Lawrence said. Clifford J. White III, Director of the Executive Office for the United States Trustees of the United States Department of Justice has said otherwise. White gave a presentation on Dec. 6, 2006 to the Senate's Judiciary Subcommittee on Administrative Oversight and the Courts, outlining just how successful the new legislation has been at stopping fraud and questionable bankruptcy claims. "Although it is far too early to determine the long term impact of the new bankruptcy law, the reforms have been workable and show promising signs for positive results in the future," he said. In the 2006 fiscal year, the Office of the Trustees estimates that more than 58,000 civil enforcement and related actions were reviewed, representing $878 million in unpaid debts, fines, penalties and other relief, White said. "Enforcement actions include such wide-ranging litigation as denials of discharge against debtors who conceal assets and monetary sanctions against attorneys who fail to fulfill their obligations to their debtor clients," he said. Concealed assets discovered include luxury vehicles, a chateau in France; frauds including mortgage scams that victimize those foreclosing on homes; identity theft ; federal benefit fraud including health care scams, White said. In regard to "means testing," White said that there is a system in place whereby debtors can obtain IRS and Census Bureau information to perform their required calculations for filing and a means for Trustee staff to process information to determine possible abuses. "Early data suggests that means testing provides a promising approach to identifying abuse," he said. Of individual debtors filing after the law took effect, 94 percent were below the median income in their states, he said. Of those above it, less than 10 percent were "presumed abusive" of the system, he added. Whereas 30 percent of all case filing were under Chapter 13 prior to the reform, they now account for 40 percent, White said. More than 600,000 petitions were filed during the two weeks prior to the Oct. 17, 2005 effective date of the new law and less than 500,000 in the 12 months following that, White said. Harry Rajak, Professor of International and Comparative Bankruptcy and Corporations at the University of Connecticut's School of Law, said that the 2005 act breaks with a generalization placed upon the United States by economists and bankruptcy attorneys elsewhere in the world. "From the scholar's position - and I work with a lot of international bankruptcy people - we've always regarded the United States as what we call a 'debtor-friendly' country," Rajak said. "It's sort of has it as its underlying rationale - looking after debtors rather than creditors." That philosophy differs from that of a country like the United Kingdom, where creditors are more protected than debtors, he said. "In a nutshell my take on the changes that took place in 2005 in the United States is that they wanted to make themselves less debtor friendly," Rajak said. "Somebody somewhere had come to the conclusion that the debtors had had a long and very happy run and maybe it's true - maybe there are lots of personal debtors out who are getting away with vast amounts of debts. I suspect not, myself - I think that when people get into debt, they have all sorts of problems." The ubiquity of credit card offers the average American is faced with in daily life may be the root of debtors and creditors' woes, he said. "I think that if the administration really wanted to look seriously at this question they would look at the whole question of the way in which credit car issuers behave," Rajak said. Karsten Strauss can be reached by e-mail at winsted @registercitizen.com.